When capital markets are hit by a storm, everyone is looking for a sheltered, safe haven for their savings. Translated to foreign currencies, this safe haven could be the USD, the EUR, the CHF or the JPY. At times like this, investors try and get out of riskier currencies and re-invest funds in the safest currencies. Mass selling results in the continued weakening of riskier currencies. It was this continued depreciation that we could observe in the EUR/HUF and USD/HUF exchange rates in recent weeks. It is worth looking a bit deeper into what may have pushed the HUF exchange rate to new record daily heights, and how it impacts our investments and savings.
What’s behind the weakening of the HUF?
If we briefly look back to 2019, we can see that the HUF was one of the worst-performing currencies, primarily due to the extremely low level of Hungarian real yields. However, the steep depreciation of the HUF over the past week is by no means a unique phenomenon, as emerging currencies, including currencies in the region, also weakened, without exception, especially against the dollar. The main reason for the depreciation of the HUF was the panic seen in the markets, which affected all emerging currencies. This is shown by the following chart:
Is the Central Bank worried about the weakening of the HUF?
It was in this negative mood that the National Bank of Hungary had to make a decision on Tuesday about whether it should consider the exchange rate stability of the HUF to be more important in the short term, or whether it should address the expected liquidity shortage in the economy. The measures taken by MNB strongly suggest that MNB is still not worried about the depreciation of the forint. Currently, the provision of sufficient liquidity is the key priority for the Central Bank, and, accordingly, it took a number of liquidity-boosting measures at Tuesday’s interest rate decision meeting, continuing the series of measures launched the previous week. It left the base rate level unchanged, and with this level we still have the lowest interest rates in the region.
The weakening of the HUF is currently one of the key tools Hungarian economic policy-makers have in maintaining the competitiveness of Hungarian production, and as, according to MNB’s most recent inflation forecast, the rate of price inflation is expected to reduce this year, the Central Bank does not seem concerned by the depreciation of the HUF. The weakening trend of the HUF may continue, and we may face repeated record weak exchange rates in the period ahead.
How does the weakening of the HUF affect us, investors?
In addition to the decline in share prices, the HUF has also fallen sharply in recent weeks. Due to the weakening of the HUF, our investments held in FX assets are worth increasingly more, as the return on investment calculated in HUF is growing. However, we can profit from the depreciation of the domestic currency even with a HUF investment, as long as the portfolio is well-structured. Those who have invested in our K&H Balanced Funds also did well, as the FX investments contained in the Fund benefitted from the weakening of the HUF, which we did not dampen through hedging transactions.
What can we, as investors, do in the present situation?
- In a carefully compiled portfolio, there are / will always be components that can mitigate the effects of assets that are declining in price.
- In the current market situation, FX assets held in in mutual funds can profit from the sharp depreciation of the HUF.
- Let’s not forget that we can benefit most from monthly regular fixed-value investments when there is this kind of drop in share prices.
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